LPAC as Protector: Material Conflicts, Material Protection

>> LPACs promote good governance when conflicts of interest affecting the General Partner in material transactions are reviewed and approved by a body (the LPAC) faithful to the Fund’s interests. This core mission is best served when the Sponsor is required to present material conflicts of interest to the LPAC so that the responsibility to keep the LPAC fully informed of all pertinent facts lies with the Sponsor, and the LPAC consents (or withholds consent, as appropriate) to the actions sought by the Sponsor. This is basic governance for most public corporations and well-run private ones; private fund governance must catch up. Here’s how to do that …

Key Provision:

“The General Partner shall present any material conflict of interest of which it has knowledge to the LPAC for review and consent.”

This is perhaps the single most important provision for allocators in a Limited Partnership Agreement (LPA) because it shifts the burden to identify material conflicts of interest for a transaction and to seek and obtain LPAC approval for any conflicts from the Allocator to the Sponsor.^1,2 The provision is analogous to the rule of “stop, look and listen” before crossing a railroad that many of us learned as children. Material conflicts should be treated no less carefully.

Funds with the best governance (like the Carlyle Partners precedent from which the above is drawn) readily accept the provision. But most General Partners vigorously resist its inclusion in the LPA. Sponsors argue that it is unnecessary, overly burdensome, or impossible to comply with given the many conflicts they face each day managing your capital. The real reason is that Sponsors do not want to bear the risk of a material conflict going unidentified and prefer to avoid the transaction costs of consultation with internal and external gatekeepers who might object.

Accordingly, before investing in a private fund without this protection, read on.

Why Sponsor’s arguments against inclusion do not hold water

As noted above, Sponsors claim “Given all the conflicts in my business, I can’t possibly agree to the material conflicts provision. It would be too hard to comply!” Allocators need to be on guard because conflicts abound in private funds—the epitome of the other people’s money (OPM) problem.

In the rest of our writeup, we look at:

Five reasons why you should reject this objection

1. Least Cost Avoider

2. Existing SEC Obligations

3. The PPM Circumscribes Risks

4. Effort vs Benefit

5. Best Practice, Transparency, and Trust

Takeaways

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¹ The fifth bullet point of Fiduciary Duties in ILPA’s Appendix A Private Equity Preferred Terms – Governance provides, “Require general partner to present all conflicts of which it is aware of to the Limited Partner Advisory Committee for review and seek prior approval for any material conflicts and/or non-arm’s length interactions or transactions.” Accessed April 29, 2025 at ILPA Private Equity Principles_revised.indd (nasra.org).² A discussion of the burdens of production and persuasion (collectively, the “Burden of Proof”) is beyond the scope of this note; however, it is DocsDiligence’s belief that the limited number of cases that have addressed LPAC Consent and this issue in particular have often failed to properly shift the Burden of Proof to the Sponsor, likely because the issue was not fully addressed by Allocator’s counsel.

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